First American: Lenders shouldn’t worry about rising interest rates

Interest rates are going up, and will likely to continue rising for the foreseeable future, but lenders shouldn’t worry, according to First American Chief Economist Mark Fleming.

The Federal Reserverecently announced its second rate hike for the year, and expects another two before this year ends. This week, Freddie Mac announced mortgage rates rose to their second highest level this year.

However, Fleming explained these rising rates will do very little to curb rising housing demand. He explained First American’s Potential Home Sales model estimates the market potential for existing home sales is currently at a seasonally adjusted annual rate is 6.11 million sales.

If the 30-year fixed-rate mortgage rising to 5%, a level that is expected by the end of 2018 or beginning of 2019, the potential would only decrease to 6.1 million existing home sales, according to the model.

“How does a rising mortgage-rate environment have so little impact on the pace of existing-home sales?” Fleming asked. “The reason mortgage rates are rising – positive economic conditions – is also causing household income to rise, which helps offset the increase in borrowing costs from higher rates.”

However, Fleming explained that the bigger worry is not rising interest rates, but low levels of housing inventory. While homebuyer demand may remain high, many continue to struggle to find a home in the supply-constrained market.

And while rising interest rates may not have much effect on the existing home sales market, it is reducing the number of refinances. Amid rising rates, a recent survey from Fannie Mae shows demand for refinances just fell to a three-year low.

In fact, low interest rates and the decrease in refinance demand even made lenders report a negative profit for the first time since 2014, data from the Mortgage Bankers Association shows.

But despite these harsh conditions and difficult lending environment, lenders can rest assured in the fact that demand for purchase mortgages, at least, is not expected to fall anytime soon.